Local media had been speculating Sanader would be running for president in elections scheduled for early 2010 and would therefore leave his post as prime minister beforehand.
However he has also announced he is quitting politics altogether.
One of Sanader’s key political goals had been to lead the former Yugoslav republic into NATO and the European Union.
While Croatia succeeded in becoming a NATO member earlier this year, EU entry talks are currently stalled due to a border row with neighbouring Slovenia.
According to some sources he has chosen his deputy, former family minister Jadranka Kosor, to replace him at the helm of the government.